Rental Properties and the Tax Reform Act
President Trump signed the Tax Reform Act into law last December 22, 2017. Several changes for the rental properties occur. Some of these changes affected tax payers who own real estate. Especially those intended for rental business.
Effective January 1, 2018, these changes are already in effect. These changes impact real estate properties in the US or abroad. The tax reform also affects every US tax payer investing in US real estate. US citizens, green card holders, or foreign aliens will expect some changes.
Most of these changes are positive in terms of the rental business. An example would be the deductions. Deductions for mortgage interest and property tax are different. The difference lies between deductions that are for personal or rental use. An individual can consider some property expenses as part of his deductions under Schedule A of his US tax return. These property deductions and state and local taxes must be for those properties not used for rental business. Those who own rental estate reports rental business expenses on Schedule E.
Tax-free Exchange Treatment Remains
The tax reform changes Section 1031 exchange provisions. It limits the application to those real estate properties that are not for sale. This means you can continue to enjoy tax-deferred treatment for your properly structured real estate exchanges. As stated under IRC Section 1031, exemption for the exchange are the personal properties. Under IRC Section 1031, personal properties no longer qualify for a postponement in tax treatment.
Qualified Depreciable Personal Property Tax Changes
There is an increase from 50% to 100% allowance. This is for the first-year depreciation deduction. The tax reform act also provides the extension and changes. The changes are for those qualified depreciable personal property. The property must be placed in service after September 27, 2017, and before 2023. Before, the law requires that the original use of the qualified property must begin with the taxpayer. The new tax law removes this requirement. This means that immediate expensing is now applicable to purchase of used or new items.
Deductions on Interest Expense are Intact but Limited for Some
Beginning in 2018, the Act generally limits the yearly deduction for business interest expense. The deduction is subject to certain exceptions. For instance, the deduction of interest expense remains intact for owners or rental properties.
The limitation does not apply to the interest acquired by the taxpayer in the following: rental, operation, management, leasing, brokerage trade or business, real property development, redevelopment construction, construction, reconstruction, acquisition, and conversion.
Generally, real property owners can still enjoy most of the provisions included in the new tax law.